Could Fuel Some Nice Returns

 | Jan 02, 2013 | 10:00 AM EST  | Comments
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On Dec. 27 Samuel Dortch, an executive vice president at FutureFuel (FF), bought about 4,800 shares of his company's stock at an average price of $11.60. Our database of insider-trading filings shows another officer purchased 5,000 shares in late November, so there is at least some agreement among insiders that the company has good prospects.

FutureFuel makes diversified chemicals and biofuels. Its market capitalization is a little under $500 million, but we think there is plenty of liquidity for most investors, given the average daily volume of close to 200,000 shares and the current share price. The shares went public in March 2011, and they've risen 15% since shortly after the initial public offering.

Total third-quarter revenue, including business with related parties, slipped 2% year over year. Gross profit, operating income and earnings were all down slightly, as well; net income fell only 1%. There were light declines in the top line for both both chemicals and biofuels -- the latter of which was responsible for a little more than half of sales, though the chemicals segment actually saw an increase in operating income.

The third-quarter performance represented a slowdown from the first half of 2012. Looking at the first nine months of the year, sales were actually up from a year earlier, and earnings were 18% higher despite the weak third quarter. Interestingly, these two points weren't related: Despite high revenue growth in biofuels, that segment has reported lower operating income than it did in the first nine months of 2011; the improvement on the bottom line is entirely due to better chemicals margins.

The current market cap represents a trailing price-to-earnings ratio of 13x, which makes sense, given FutureFuel's steady business overall. There is only one sell-side analyst covering the stock -- so, while 2013 earnings are supposed to come in higher this year, there is only one opinion, rather than a consensus. This only adds to more general concerns that the Street may be too bullish on stocks.

FutureFuel also reported nearly $200 million in cash, cash equivalents and marketable securities in its 10-Q filing with the SEC. With about $70 million in other current assets and $42 million in current liabilities -- as well as about $60 million in noncurrent liabilities -- it's fair to say that a significant portion of the stock's valuation is in cash. The company did recently pay a special dividend to shareholders, which we estimate used $50 million in cash. The enterprise value is 4.2x trailing earnings before interest, taxes, depreciation and amortization, which is low for an EBITDA multiple. Even after we take into account the recent special dividend, the metric should still come in under 5x.

For FutureFuel, the main question regards the differing trends in its business this year -- namely, it's seeing higher margins in chemicals, and the company has failed to capitalize on a growing biofuels business. We'll have to watch how all this will play out going forward, as well as the complication that biofuels sales growth may be slowing or halting.

The dividend is 3.8% at current prices, and the company announced $0.11 quarterly payments for the new year. Between this, the company's cash and the beta of 0.4, FutureFuel also looks like a potential defensive pick. The special dividend demonstrates that management keeps shareholders' interests in mind -- and given the recent payout increase and the cash-flow-generation characteristics of the chemicals business, we expect the yield to remain high.

There is a decent value picture at FutureFuel, looking at both the price-to-earnings ratio and the ratio of enterprise value to EBITDA. We can see why these insiders like it, given the stock's limited exposure to broader market conditions and the high dividend yield. However, it's probably best to dig deeper into the status of the company's two segments before any decision based on value.

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